What Markup Should Contractors Use to Hit Their Target Margin?

To hit your target margin, the formula is:

Price = True (Loaded) Job Cost ÷ (1 − Target Margin %)

To hit a 50 percent gross margin, you charge 2 times your true cost. That is a 100 percent markup on cost. To hit a 40 percent margin, you charge about 1.67 times cost, roughly a 67 percent markup. Read that again if it feels off, because the gap between those two numbers is where a lot of contractors quietly go broke.

Markup on cost and margin on price are not the same number. Markup is measured against your cost; margin is measured against your price. A 50 percent markup does not produce a 50 percent margin, it produces about a 33 percent margin. Confusing the two is one of the top causes of underpricing in the trades.

Target margin	Multiply cost by	Markup on cost
40%	1.67×	67%
50%	2.00×	100%
60%	2.50×	150%

Here is the trap in action. An owner wants a 50 percent margin, adds a "50 percent markup" to cost, and lands at a 33 percent margin without realizing it. On a $1,000 true-cost job they charge $1,500 and keep $500, or 33 percent of the sale, not the $1,000 they thought they were making. Do that on every job and you are 17 margin points short all year.

The other half of the trap is the word "true" in true cost. If your cost input is just the wage and materials, you have already lost before the markup math starts. True cost means loaded labor cost, the wage grossed up for burden and utilization, plus materials, plus any subs. Mark up the real number, or you are carefully hitting a target off a wrong starting point.

So the sequence is: get true loaded cost right first, then divide by (1 − target margin) to get price. Never eyeball a markup percentage and hope the margin lands.

This formula comes from the Home Services Metrics Scorecard, the KPI catalog the M1COS dashboards run on.

Since this all depends on true cost, start with the Job-Costing Calculator and make sure your labor input is right by reading What Is Loaded Labor Cost?. To confirm the margin you are targeting is the right one, see What Is a Good Gross Margin for a Home Services Business?.

FAQ

Is a 50 percent markup the same as a 50 percent margin?

No. A 50 percent markup on cost produces about a 33 percent margin on price. To get a 50 percent margin you need a 100 percent markup, meaning you charge 2 times cost.

How do I convert a target margin to a price?

Divide your true loaded cost by (1 minus the target margin as a decimal). For a 40 percent margin on a $1,000 cost: $1,000 ÷ 0.60 = about $1,667.

What does "true cost" include?

Loaded labor cost (wage grossed up for burden and utilization), materials, and any subcontractors. If you mark up only the raw wage and materials, the margin math is built on the wrong number.

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